Getting the message across
10 June 2002
The gap between the quality of life that people now expect to enjoy in retirement and the reality of what most current pensions will provide is a real concern. Having largely opted out of the pensions game in the mid-1980s, the Government has tried to push responsibility on to employers, who in turn are now pushing as much of the responsibility as they can on to individual employees.
The uncomfortable fact is that with more of us living longer, older forms of pension provision have become unsustainable. Last year, the Government decided it was time that everyone knew just how small the pot of retirement savings waiting for them is likely to be. It began piloting trials of total benefit statements that include all sources of pension income - state, personal and employer-sponsored. With some forecasters predicting that a whole generation could end up living as pensioners as long as they do in work, it is a message with considerable implications. The result of the trials was not good. Rather than be shocked into extra savings, more employees seemed to ask "What's the point?" and actually ended up saving less. But what role do employers have to play in this pension crisis?
There are over 25 million members of occupational pension schemes in the UK and employer-run schemes are an essential plank of the Government's pension plans. But what is in it for employers? One reason for offering a pension is a concern for the wellbeing of staff - a desire to look after the firm's best assets, even once they have stopped producing for the firm. This has a payback, as younger members of staff, seeing how well older employees have been treated, feel good about the firm and are motivated to work hard. Employees certainly rate pensions as an important part of their reward package. Whisper it quietly, but some are even canny enough to understand the significance of a decent pension for their future. But problems will arise when retiring employees find out too late that their pensions will buy an annuity that will barely allow them to get by.
The Government's experiment with combined benefit statements would suggest that keeping staff informed about how poorly their pension fund is doing does not motivate them to save more.
So what are the options for avoiding this negative feeling being reflected back on the firm? The difficult route for firms is to opt-in to the responsibility for providing for employees' futures. The difficulty is that older models of pensions, often based on paying a fixed percentage of final salary, will only work when the balance between employees and pensioners remains stable and when there is a large enough pot to invest for a decent return. This is why most pensions offered by law firms, and indeed three-quarters of all the UK's 200,000 occupational pension schemes, are now defined contribution schemes.
In defined contribution schemes, and in particular group personal pensions (GPPs), which have added flexibility, individuals draw out of the fund that they have contributed to the scheme (which has usually been matched and topped up by the employer in increasingly generous sums as staff climb the ranks).
GPP schemes also mean that the employing firm has to do little more than facilitate the arrangement, pick up a few administrative fees and organise payroll deductions. The Government offers tax breaks, does everything it can to get additional contributions from employees and reminds everyone how little they are saving.
The value of this type of scheme for employers is that it is easy and cheap to set up. It is a competitive market and providers will offer extras such as promoting and communicating the scheme to staff for little or no added cost. For employees, these schemes also have an upside. They give staff more control of how their money is invested (including ethical funds or low-risk options for those near retirement). Because the account is personal to them, and not the employer, they can also take it with them if they move jobs.
The key factor for employers is how such a scheme is communicated. Offering to match or even double employee contributions is one way of maintaining the appeal of a full-blown final salary pension without the same costs. Providers can usually be relied upon to help with the promotion of the scheme. Communicating the positive aspects of the scheme, such as its flexibility, can go a long way to ensuring that the scheme is viewed positively by employees.
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